Why the US Dollar Is Booming And Creating A Possible Doom Loop

Tracy Alloway (0:09)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

Joe, happy Parody Day to you.

Joe Weisenthal (0:17)

So I looked, I actually got a little late this morning.

Tracy Alloway (0:21)

But like 5 a.m. instead of 4

Joe Weisenthal (0:24)

But I don't think it, did it quite exactly hit a dollar? I saw some ambiguity. It looked like the low on the terminal was like, Euro 10000001 or something. Then I saw others posted, I don't know.

Tracy Alloway (0:38)

It's sad that we work for a gigantic financial data company and we can't figure this out. I thought it did. I'm pretty sure it did very, very briefly.

But let's just, even if it hasn't actually hit parody today, we're recording this on July 12th, it seems like it's going to any moment. And I got to say, the fact that we're recording this episode though probably means that this is marking the peak, right?

Joe Weisenthal (1:04)

Yeah, so of course, when this episode comes out, it's going to be the peak of the dollar because that's how it works.

Nonetheless, yes, Euro has come very close to parody with the dollar, de facto parody. The dollar itself is just like incredibly strong. It might even be, obviously, inflation and the trajectory of inflation is sort of this huge variable question for the economy. But in terms of like, maybe the defining market story right now has just been this incredible strength, the US dollar, which of course has all kinds of ramifications.

Tracy Alloway (1:37)

Exactly. So setting aside what happens to the Euro, you cannot argue with the fact that we have had this broad-based dollar strength. You know, there's some irony that, of course, everyone's talking about the end of the world, and we recorded episodes about how the Russia-Ukraine conflict and the sanctions mean that the dollar is gonna fall out of favor in the global financial system.

And yet, the immediate knee-jerk reaction to the world falling apart is dollar strength. It almost always is.

Joe Weisenthal (2:04)

Yeah, right. Because in the end, in the good times, you never really have to pay your bills. You just sort of roll over your debts, or you don't worry about that, or you're flush with money.

In the bad times, you're like, oh, how am I gonna pay my bills? I can't pay my bills probably in Bitcoin. I can't pay my bills in shares of Tesla. I can't pay my bills in shares of ARK or whatever.

What I do is I need dollars, so everyone scrambles for dollars, and they get more expensive.

Tracy Alloway (2:30)

Right, so the dollar is basically a play on risk appetite at this point. But I guess the ultimate irony, this is the second time I brought up irony so far.

Joe Weisenthal (2:37)

The ultimate, ultimate irony.

Tracy Alloway (2:38)

The ultimate, ultimate irony is that when everyone's worried about the future of the economy, the dollar tends to strengthen, and then the dollar strengthening actually has a negative impact on the global economy. And so you can get the situation where it becomes a self-fulfilling cycle. The dollar doom loop is what some people have called it.

Joe Weisenthal (2:59)

Yeah, a feedback loop. But if you're in Germany and you're already sort of like moving from this huge current account surplus to a current account deficit, largely due to the surging price of energy, and then obviously everything becomes even more expensive now, especially things priced in dollars or invoiced in dollars. And so yeah, you can have this sort of doom loop where the strength of the dollar even further puts the squeeze on different players.

Tracy Alloway (3:23)

Yeah, so without further ado, to talk about the doom loop and more broadly what's going on with the dollar and a bunch of other currencies like the Euro and the Yen, we are going to be speaking with Jon Turek. He is of course the founder of JST Advisors and the author of the Cheap Convexity Blog.

Jon, welcome to the show.

Jon Turek (3:42)

Thank you so much for having me.

Tracy Alloway (3:44)

So I think the first time we had you on was actually to talk about exactly this dynamic, the dollar doom loop.

Jon Turek (3:51)

Yeah, it was. It was actually, I think in the beginning of 2020, around pandemic had just started and it was really the first time the Fed really fully unleashed its swap program in terms of foreign exchange.

And I thought that the doom loop was a very prevalent factor in kind of the 2010 cycle where we saw this slowdown in the manufacturing side of the economy, largely on the fact of China's aggregate growth numbers starting to structurally fall, which as the US is less exposed to global trade, global manufacturing, saw it become a relative beneficiary. And then given the dollar linkages through global trade and manufacturing, it only reinforced the weaknesses in manufacturing. So it seems like we're in a similar dynamic with different catalysts.